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How To Invest In Winners In China: Jenny Lee - Midas List

It was a difficult year in 2012 for China investors, with just two IPOs in the U.S. for China companies. But Jenny Lee, a partner at GGV Capital in Shanghai who is number 36 on the 2013 Midas List, has had four exits over the past two years from China companies. We caught up with her to talk about the lack of exits in China and how her firm approaches China investing. GGV recently raised $625 million in new funds.

In 2010 she invested in YYYY, which went public last year. In 2004 she invested in software-development outsourcing service HiSoft, which went public on the Nasdaq in 2010. She also helped craft its merger with VanceInfo to form Pactera in October 2012. She invested in data center services provider 21Vianet in 2008, which went public in 2011. Lee also led the investment in security banking company SinoSun Technology, which went public on the ChiNext in 2012. Here’s an edited version of our interview.

The China IPO market slowed down significantly last year. There also been increased scrutiny on China IPOs after accounting problems. What’s the state of the market now?

Last year in the US the only China IPOs were VIP Shop and YY. On China exchanges (IPOs), the first half was okay. The CSRC stopped the IPO window. There was a change in China leadership, elections in the U.S., everything was on hold. Everyone was waiting to see what happens. There’s definitely increased scrutiny. There was a pipeline of 800 companies domestically waiting to IPO. There’s an expectations this could drop by 40 to 50%. The market has been pretty slow from an exit perspective.

How has the market reacted?

We’re starting to see more mergers and acquisitions in China. In the US about two-thirds of venture and private equity exits are from M&A. In China historically it’s been more IPOs. M&A’s before were small. We’re starting to see more willingness (for Chinese entrepreneurs) to say, ‘We can’t go out (in an IPO).’ There’s a willingness to engage in that discussion. The Youku and Tudou merger in China was a phenomenon. The two rivals were in a fight on every front. The other merger was HiSoft and VanceInfo. So there are good quality companies.

Why have there been so few acquisitions in China?

In China, there’s the mentality of either ‘survive or die.’ But people see now you don’t have to fight to the finish. Maybe it’s better to sell. You can have a pretty good outcome.

How were you able to grow UCWeb and YY so big, despite much bigger competitors like Alibaba, BaiduBaidu, Tencent and others?

If you have had a chance to work with the “giants” when they were young, you have the ability to work in the ecosystem. That’s a differentiator. With Alibaba, we were an early investor. That allows us to see and understand their strategy.

For startups many grow up around giants. It’s very dangerous. When they come out after you, they go all out. They set up shop next to you. They can hire your employees at five or ten times the pay. If you’re a game company and you use their tools, you can end up not on their ecosystem. In the U.S. that could be monopolistic. But they can do that. Or they can do it at first, then they’ll back off.

There’s three ways to manage this. First, is when “fighting with giants.” That category’s become very interesting. Qihoo 360 (2011 IPO) grew up fighting with the giants. It survived by trial and error. Typically that’s where you see the next potential giants. It’s very strategic what to fight on, however. It’s very strategic what areas not to touch so the giants don’t put you in their top competitor list. We have a lot of strategy discussions.

So they don’t notice you?

Yes. If they’re fighting and have their attention on someone else, there may be a bit more time and a window for you. So you have time for companies to grow. For example YY was a big surprise to Tencent. The company grew up next to their backyard. Now they’re trying to compete but it’s very tough. (GGV investment) UCWeb on the browser side is a pure play in the mobile sector. So UCWeb has 70% market share on mobile.

How about partnering with these giants?

The second category is “working with the giants” – for example, our company Meilishuo (an online social style and shopping site). Tencent and Alibaba both get traffic and direct benefits (from consumers buying) via Meilishuo.

There’s opportunity and there’s also danger. How do you balance that relationship? When do you decide to declare your alliance? Do you declare early on or try to be independent and neutral up until a certain point? There’s a lot more strategic discussions. There’s a lot of companies in that category.

Can you avoid the ‘giants’ completely?

The last category is “away from the giants.” You look at the giants: they’re in Internet e-commerce, search and social networks. But that’s not all (the areas to invest in). For enterprise companies, the giants feel it’s a tough business because they’re used to 70-80% gross margins (with consumer services). It becomes tough for them.

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